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19 October 2021

IFRS 16: Six months to go for public sector organisations

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End your admin burden

Now is the time to become compliant and get your leases, processes and systems in order to meet the April 2022 deadline.

There’s not much time left for public sector organisations to become IFRS 16 compliant. IFRS 16 legislation introduces significant changes to the treatment of leases for financial reporting purposes. Given the estimated 75,000 leases in place across the public sector, finance officers in a wide range of public entities will need to become familiar with this new reporting standard.

How will IFRS 16 impact the public sector?

The three main implications of IFRS 16 to impact public sector organisations are:

Impact modelling

In practical terms, lessee organisations are likely to appear more asset-rich, but also more indebted than under the current system. In light of this, it's important to determine the extent to which the new standard will impact your financial targets and key performance indicators. This will involve centralising all lease data onto a central platform and then modelling the data based on various leasing accounting scenarios.

Exemptions

For public sector bodies, there is no set threshold for determining whether an asset is 'low-value' and thus exempt. Financial officers will need to review their asset portfolios alongside official guidelines to determine which leases qualify for the low-value exemption.

Discount rates

You'll need to consider the terms of individual leases to ascertain whether the discount rate can be determined. If it can't, you'll then need to establish whether the Treasury discount rate applies, or whether it would be a more accurate reflection of your incremental borrowing rate.

What challenges are public sector organisations likely to encounter?

Whether you work in a local authority, central government department, quasi-autonomous governmental organisation, NHS trust or university, much more detailed lease-by-lease analysis for financial reporting processes will be required.

This is likely to give rise to the following challenges:

Do you have the full picture? There may be multiple leases in play across a single public sector body. You'll need the ability to store, manage and update this information with ease.

Are you implementing IFRS 16 in an appropriate and consistent manner? In some areas reporting officers will have some discretion on how to proceed, such as whether or not to separate the leasing and service elements in a contract. Having the right modelling capabilities at your fingertips should make it easier to make more data-driven decisions that reflect the strategic objectives of your organisation.

Can you handle an increased processing burden? In certain areas, such as asset depreciation calculations, applying the correct interest rate (which may differ from lease to lease), and updating leasehold information, public finance departments will need to look carefully at whether their existing resources are sufficient to meet a potentially larger workload.

What next?

We've created a guide to help you get through the new regulations. Download your free copy below.

We partner with CCH Tagetik. Their lease accounting solution is designed to achieve compliance, while providing an effective framework for managing a growing volume of lease accounting data. Get in touch today to find out more.

MHR

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